I’ve worked in financial services for nearly three years now and you want to know one thing that really irks me – when someone says personal finance is simple. MONEY IS NOT SIMPLE. It’s not about putting numbers on a spreadsheet. And avocado toast is not the reason why millennials aren’t buying homes! Let me explain…
The psychology of money
I’m fascinated by psychology. More accurately, I’m fascinated by the human brain, how it works, how people process information and ultimately the conclusions they draw from it. It was this fascination with people that lead me to a criminology degree. It might not seem like a logical choice, especially when I could have just studied psychology and called it a day, but criminology was created so that we could better understand why people behave as they do and when we understand why we can respond appropriately. I was naive to believe that was how the criminal justice system actually works. And then, nearly three years ago, I found myself in the world of financial services: investing. And what’s more understanding about human behaviour than money?
Morgan Housel wrote in his book The Psychology of Money, “financial success is not hard science. It’s a soft skill, where how you behave is more important than what you know. I call this soft skill the psychology of money. [And] doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behaviour is hard to teach, even to really smart people.”
Money is personal. And people are complicated. Understanding our relationship and experiences with money can be difficult. Budgeting is easy, it’s a formula, but it’s a lost cause until you understand your relationship with money. For example, those who grow up in a paycheck-to-paycheck home are often more motivated to be thrifty, save and live below their means. The converse is also true.
Budgeting is not one size fits all
How we spend our money is our business. I hate when I see pre-made budgets that pre-qualify what’s an “optional” expense. We all have different ideas of optional, not to mention what’s necessary for our happiness. For example, if eating out brings you joy but you’re trying to save money, you don’t have to stop eating out. Instead, try this: cut down the number of times, look for less expensive restaurants, research deals or discounts. Saving money, budgeting and being “smart” with money, doesn’t have to mean being miserable and cutting out everything you love.
I believe the same when it comes to large purchases. We’ve made two large purchases in the past year that on paper would qualify as money mistakes, or “bad with money”. One was our Peloton. We couldn’t avoid it outright because it’s so expensive, so we opted for a monthly payment at 0% interest for the next 3 years. On paper, I wouldn’t recommend buying something you a) can’t avoid outright and b) adding a monthly payment when you’re paying off debt. However, it’s worth every penny for what it brings to my mental health – it’s also cheaper than a gym membership!
Reframing your relationship with money
What works for someone, might not work for someone else. You have to determine what tactics will work for you so that you can stick to them and form good habits. Key techniques include changing the environment to avoid temptation, creating different cues such as reminders, making things you must do obvious, leaning on friends and family who share your values and will support your financial goals and of course, automating your savings and investing.
Money is more than income and expenses. Even if you earn a £200,000 salary a year, you can still be living paycheck-to-paycheck with huge levels of debts if you don’t plan for that income. Someone else may be earning just a fraction of that, but still, be living a more financially secure life than the former. It’s important to create a mindful and sustainable lifestyle, one where your core values are the foundation for your decisions. Align your money with your goals. When you can do that in every aspect of your life, including money, it will be easier to manage your finances.
Unpopular opinion: I’m okay with debt
Controversial? Yes. But I stand by it. I’m comfortable with the concept of debt, but I’m not okay with working multiple jobs, draining myself day in and day out, just to pay off my credit card or loans at a faster rate. For years, having credit card debt was like a dark secret to hide but actually, the more I’ve talked to people, it’s so clear to me that you have to figure out money on your own terms. Your situation will never be someone else’s situation and at the end of the day, we only have so much control over our finances. We don’t have much say over any number of factors that influence our financial situations. That’s what makes personal finance so complicated. It is truly personal. And it’s what I struggle with most when writing about money, I can’t possibly understand your relationship with money or generalise it. Personal finance is nuanced, some people have a high debt tolerance, others are more geared towards long-term savings.